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A UK buyout firm has begun a "frantic" search for a new major investor after a default by its existing cornerstone backer threatened to cut short the life of its fund.

Advantage Capital is talking to “tens of investors” in an effort to replace an individual who previously accounted for almost the entire £40m fund, according to a source close to the situation.

The investor, Robert Adair, chairman of UK oil and gas exploration company Melrose Resources, had personally committed more than 90% of the entire fund but in February told Advantage he could not honour it. Early last year Adair informed the firm he could not meet the commitment for the time being, which led to an agreement between the parties that Advantage would suspend the fund.

But in an unusual move against an investor, Advantage took Adair to court. He was ruled in breach of his contract with the firm, meaning that Advantage may be set to win tens of millions of pounds in damages.

Martin Bodenham, a co-founder of Advantage, said: “We have done what all others have done in those situations. There was nowhere to go other than court because a contract is a contract.” Adair declined to comment, according to a spokesman for Melrose.

Advantage’s fund now faces an uncertain future – it has entered a run-off process, whereby a private equity fund closes down and does no new deals. However, the firm hopes to keep it alive by securing money from new investors.

Bodenham said the firm had begun looking for new capital from European high-net worth individuals and institutions. It hopes to bring the fund back up to its original £40m but would like to increase it to up to £60m.

The firm has about 35 investors, including Lloyds Banking Group, which was its second-largest investor with a £7.5m commitment, but Bodenham said it wanted a large main backer.

He said: “We are at the moment operating in an unusual position – we are hoping to be able to continue the business but that is reliant on us being successful in attracting new investors. We are now focusing entirely on trying to get replacement investors in Mr Adair’s shoes.

“Most of the effort has gone into the court case and we are now focusing in a frenzied way on raising capital. It is no secret it is a lousy fundraising market; one only has to look at the broad statistics. We are realistic about the lack of appetite amongst investors at this moment.”

If Advantage failed to secure a new cornerstone investor its collapse would mark a rare death of a buyout firm.

A report in 2008 predicted a swathe of collapses among private equity houses with Spain’s IESE Business School and management consultancy Boston Consulting Group expecting 30% of buyout firms to survive, 20% to 40% to go under and the remainder to “hang in the balance” during the credit crisis. The prediction came as firms suffered from a lack of debt globally, which had fuelled the buyout boom, and the deepening economic crisis.

However, the expectations have yet to manifest – with UK-based Candover Partners, which ran intro trouble when its listed parent and biggest investor cancelled its cornerstone commitment to its latest fund, being one of the few other examples to run in trouble. Candover is now expected to adopt a deal-by-deal equity raising model instead of trying to raise a new traditional fund.

A London-based buyout executive said: “This industry does not move that quickly so far as a shakeout is concerned and what will happen is in the next three to five years there will be some people who will not be able to raise money and they will run off portfolios.”

-- Write to Jennifer Bollen at jennifer.bollen@dowjones.com

Bodenham called the timing of the default “frustrating” as Advantage targeted turnaround deals and recessions provided the best distressed investment opportunities. He said: “We have been looking for a long time for the rain clouds to arrive because it is then that we do our sweetest deals.”

Advantage has made seven investments since its 2001 inception and generated a return of about three times its investment on four sales. It has made one loss, in betting shop chain Pagebet this year. It invested £50m in the deal and lost £6m. Bodenham said the rest of Advantage’s portfolio remained healthy.